Mortgage Closing Costs and Fees
Overview
You’ve probably heard of closing costs. Any time you get a mortgage there are closing costs and fees associated with that mortgage. Here we’ll help you understand each one so that you can come prepared to the closing table.
Points are a good way to reduce your interest rate and the amount you pay for them is usually tax-deductible.*
Rates can go up one day and down the next. Whether you lock in your rate or float your rate depends on how much risk you can tolerate. When you’re done, find out what kind of home you can afford with our home affordability mortgage calculator
In addition to understanding all the mortgage options you have to choose from (your Mortgage Banker will help you with this), it’s good to know the costs associated with your mortgage ahead of time so you’re fully prepared for closing. Any costs will be paid upon closing your mortgage.
Purchase Points
Purchase points, also known as a “buy-down” or “discount points,” are an up-front fee paid to the lender at closing to buy-down or lower your interest rate over the life of the loan. Each point is equal to one percent of your total loan amount. If you have a $100,000 loan, one point would equal $1,000. The more points you buy, the lower your interest rate, but the more money you’ll need at closing.
How do you decide whether you should buy points and if so, how many? Well, the decision should be based on how long you plan on living in your home and what you can afford to pay each month toward your mortgage. If you plan on living in your home for more than five years, it’s probably a good idea to purchase points. The longer you live in your home, the more you can save on interest over the life of the loan. The more you read about the purpose of mortgage points; the better off you’ll be in your home loan process.
Interest Rate
When you get a mortgage, you are charged an interest rate – this is the rate which the lender charges you for using their money to buy a home. It determines how much your monthly payments will be. Generally speaking, the higher the interest rate, the higher your monthly payment.
Mortgage interest rates change constantly – daily, even hourly. If you speak to a lender and are quoted a specific interest rate, don’t assume you’ll necessarily get that rate when you close on your loan. Not unless you formally lock-in that rate with the lender – locking in an interest rate will guarantee you get your loan with a particular interest rate. Lenders will allow you to lock in for 15, 30, 45 or 60 days. But the longer you lock in, the more expensive it will be, since it’s more of a risk to lenders. Check out our “mortgage interest rate and payment calculator” to find out instantly how much a new home will cost each month.
Fees
There are typically always fees associated with getting a mortgage; these fees cover the cost of processing and underwriting the loan. These fees can include charges for ensuring the title to the home is free and clear; paying for a land survey; or paying for a home appraisal which gives you the estimated value of the property (lenders require an appraisal to close on your mortgage).
Deciding which mortgage to get may depend on what each lender does because different lenders may charge different amounts. Some may charge lesser closing fees to lure you in, but may charge you a higher interest rate, which means you, may pay more in the long run. But everyone has different needs – you may or may not be able to afford to pay more at closing and are willing to pay more over the long term.
Before it comes time to close, do your homework, make sure there are no hidden fees, and ask your lender lots of questions so that you understand all the costs involved with your mortgage. Talk to your mortgage banker about questions you have regarding closing costs, or check out the Guide to First-Time Home Buyers for a great, easy-to-understand deep dive into your experience at closing.
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With 11 years in the lending industry, Ted is proficient in structuring the client’s loan to ensure that the client obtains the best financing. He has become a recognized leader in real estate education and hosts real estate seminars for his clients and the business communities in the Southwest. His attention to the details and in-depth knowledge of the loan process ensures that you are getting the best service possible.
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